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Skip Navigation LinksHome :: Back Issues :: Privatization takes a small step forward

November 2001

Privatization takes a small step forward





       
Shourie: long battle ahead
The first good news for Indian privatization this year came in early October. The government announced the sale of two small companies. A 51% stake in CMC, a software company, was sold to Tata Sons, which owns Tata Consultancy Services, India's biggest software exporter, for Rs1.5 billion ($31 million).
A 74% stake in Hindustan Teleprinters sold to Himachal Futuristic, a local telecom company, fetched another Rs550 million. On October 23, the cabinet cleared the sale of three more companies including two that run several hotels. The bids will be out in November.
For Arun Shourie, India's minister in charge of privatization, these are minor victories in the long battle ahead. Of the Rs120 billion the government hoped to raise this fiscal year from privatization, it has netted just Rs2.07 billion in the first seven months. Early this year Shourie fought a pitched battle in parliament and against irate unions to push through the privatization of Balco, an aluminium company.
A cabinet reshuffle in September elevated Shourie to cabinet rank while two of his colleagues in key telecom and civil aviation ministries, who were opposed to privatization, were unceremoniously dumped. That seemed like a decisive political victory for privatization.
Yet a day later Singapore Airlines (SIA) walked out of a joint bid for Air India, the international carrier, because it was discouraged by the "political noise" around the deal. Bankers say a rival bidder, a London-based non-resident Indian business group, helped spike the SIA bid for Air India. Shourie, a quietly spoken former editor with a clear reputation, conceded it was a setback for Indian privatization.
After the events of September 11, it is unlikely that Air India will find an international buyer soon. Pradip Baijal, the secretary of the Disinvestment Commission, an oddly named panel that oversees Indian privatization, says given the crisis the aviation industry faces, he does not expect the Tatas, the stranded partner of Singapore Airlines, to find another foreign partner in the near future.
Deals that kick up a political fuss such as Air India are unlikely to get done easily. This means big investment banks that won key mandates have in some cases been sitting on them for years. The list of "killed" deals is long. Goldman Sachs won the mandate for Indian Oil Corporation several years back but the sale has been put off. Warburg Dillon Read has one for IPCL, a petroleum company where the sale of a 26% stake is likely to be tendered once again.
JM Morgan Stanley vetted the bidders for Air India. One disappointed foreign banker says: "Vested interests are entrenched in the government. We do not expect really big ticket privatization of the oil and gas companies to happen for a long while."
There is so much suspicion of the government as partner that a strategic partner expects a substantial discount in the price to even consider putting in a bid, says another.
As a result, there are few bidders, particularly foreign ones, for the companies on the block. According to Baijal, about half of the 13 companies the government hoped to privatize this year have no bidders. Indian Airlines, the domestic carrier, is an example. "These companies, mostly in heavy industry, are in bad shape. We have sent them back to the government ministry," says Baijal.
That leaves about half a dozen companies such as international telecom carrier VSNL; Maruti, the car manufacturer where partner Suzuki will get majority control by way of a rights issue; IBP, a petroleum company; and Indian Tourism Development Corporation, a bunch of hotel properties. Of these both VSNL and IBP will have to be sold soon as the government plans to open up the international telephony and petroleum sectors next year, says Baijal.
Foreign companies perceive a nationalist bias in the privatizations that have happened so far. The present Bharatiya Janata Party-led government's political atttire is swadeshi (nationalist). Modern Foods, Balco, CMC and Hindustan Teleprinter were all sold to Indian companies; the first was sold to Unilever's subsidiary in India. The three companies shortlisted for the sale of a 26% stake in VSNL - Tatas, Reliance and BPL Group - are Indian conglomerates.
Bankers say foreign bidders for VSNL withdrew quietly, perhaps sensing that the government was reluctant to give control to foreign companies. Of the 40% of Air India that is being offered to a strategic investor, the foreign partner cannot own more than 26%. That kills the interest that any foreign airline might have in a deal.
As one US banker asks: "Which foreign airline would like to put its capital, name and reputation behind a loss-making company with huge labour problems in a hostile political environment for so little?"
Rajeev Gupta, M&A head at DSP Merrill Lynch, who helped the Tatas clinch the CMC deal, says: "Privatization is inextricably linked to the government's policies for foreign direct investment. If those policies have not been liberalized enough, it is unlikely that foreign investors will be keen."
Udayan Bose, chief executive Lazard India, which is managing the sale of ITDC, a government hotel company, adds: "Privatization is a catalyst to bring in large doses of FDI. But the timing has to be right and the companies need to be of meaningful size and quality."
If foreigners are discouraged from joining the race, the government will get lower prices for privatization assets. "The Indian private sector is too small and simply does not have the cash to buy out the public sector," says one banker. Also, the more the government delays their sale, the less it will get for them. Take the case of Maruti, the biggest car maker. A few years back when the company dominated the car market, the government refused to sell even a small stake to its partner Suzuki, which would have given the Japanese company control.
Today, Maruti's market share has been eroded and the sale of shares to Suzuki through a rights issue is likely to fetch much less. Similarly, shares of the state banks fetch much less today than when they were unchallenged by new private banks. Says Lazard's Bose: "When Deutsche Telecom and British Telecom were fighting to get VSNL's attention for a 10% equity slice some four years ago, we dismissed them because they were foreigners. Today they have other priorities." Swadeshi or not, Indian privatization is clearly functional.






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